Brendan Wallace is the co-founder and managing partner of Fifth Wall Ventures, a venture capital fund dedicated to investing in start-up tech solutions for the real estate industry. The fund’s name alludes to the fifth “disruptive” wall the firm provides in addition to the four physical walls of a building. Founded just a year-and-a-half-ago in Los Angeles with Brad Greiwe, 35, the fund has raised $212 million to date, mostly from nine of the country’s largest real estate companies, includingCBRE,Equity Residential,Macerich Co. and Lennar Corp.

Fifth Wall has injected money into real estate tech newcomers like short-term retail rental platform Appear Here, OpenDoor, which lets people instantly buy and sell homes, and States Title, which is seeking to revamp the title and underwriting process, as Commercial Observer previously reported. The fund led an investment group with Bessemer Venture Partners that acquired a majority share of WiredScore, a company that uses a rating system for tech capacity in commercial buildings and was founded by Arie Barendrecht and Jared Kushner in 2013. Kushner sold his stake in the company to the group in October. (Purchasers included Kushner’s brother, Joshua Kushner among other angel investors.) Fifth Wall declined to comment on the acquisition.

High-caliber partnership and buy-in from industry leaders is key to the fund’s success, Wallace told CO during an interview over lunch at Café Hill in Downtown L.A. in the middle of the month. Wallace, 36, was in the area to partake in “RETHINK: Emerging Macro Trends in Real Estate,” the eighth annual SoCal commercial real estate conference, trekking from his company locale on the West Side in Venice.

Commercial Obsever: How did your partnership with Brad and the founding of Fifth Wall come about?

Brendan Wallace: We got to know each other as we were doing a lot of individual angel investing and saw this opportunity.

Real estate is the largest industry in the United States, representing 14 percent of the gross national product and the largest asset class, the largest lending category, the largest store of consumer wealth. Yet it is clearly one of the least technologized. It’s slow to adopt technology. That’s true empirically; it spends a small percentage of industry revenue on [information technology]. Even impressionistically, when you walk into that building [South Park Center where “Rethink” was held] nothing about that experience has changed in the last 20 years. It’s a very outdated industry. We saw all that changing. [Real estate investment trusts, or] REITs, large REITs were, for the first time, hiring chief information officers, digital strategists. You’re starting to see real budget open up to adopt technology across the real estate world.

When did you see that start to happen?

We probably started seeing that as far back as five years ago, but in the last two years it’s rapidly accelerated. The reason it’s suddenly accelerated is the maturity of companies that can meet those needs.

Say something like [customer relationship management] software. Yardi was the only game in town for a while, but now there are three or four companies that also serve that need.

When you look at real estate tech and who is producing big outcomes, you think about two or three of the unicorns today likeWeWork andAirbnb,Zillow andPriceline andExpedia. Hundreds and billions of dollars have been created in hospitality tech, yet we couldn’t find a dedicated venture fund, which we thought was odd because you have venture funds for transportation tech, cannabis tech, whatever it is, small categories when it comes to the total U.S. economy.

Why is that?

There are couple of reasons for that. One is there’s not a lot of people who come from the real estate industry who are in tech. There is just not a wide overlap of people who have those two skill sets.

The second reason is that real estate tech has a peculiar risk profile [compared to] other types of venture capital. It tends to have very low technical risk because the baseline of technology in the industry is so low, what constitutes real innovation is usually quite simple. It could be something simple like we take your vendor management logs and we put them in the cloud. We don’t typically face the big technical risks, like can you build it, does it work, is it better than the status quo? Most ideas in real estate tech are good ideas.

All the risk hinges around distribution. If you can’t sell your product to two or three players, you have no one else to sell to, right? The entire success or failure of the business hinges on a very small number of contracts. So, the way we try to solve that is raising venture capital that’s independent but that access to capital comes from the largest buyers in real estate technology. The kingmakers, the deciders of who wins and who loses—let’s raise capital from them.

So, we went to the biggest real estate groups and we systematically raised $15 million from CBRE, the largest commercial broker, Prologis, the largest industrial REIT and Lennar Corp., the largest home builder, Hines, the largest office developer, Host Hotels & Resorts, the largest luxury hotel owner, Macerich, the largest mall owner, and then Lowe’s home improvement, came in as well.

Did you invest your own funds?

Yes, all funds have a general partner commitment, which I can’t disclose—funny thing those [Securities and Exchange Commission] rules (laughs). [In the most recent SEC filings from May 2017 for the fund, they declined to share the issuer size, but the total offering amount and total sold was $210,000,000 with zero remaining to sold.]

After graduating with a bachelor’s in political science and economics from Princeton University in 2006 you came out west to get an MBA from Stanford University and you’ve been in California ever since?

Yes, I’ve been out in California since then. Born and raised in New York City and Brad is from Cincinnati. I moved to Los Angeles San Francisco three years ago.

Are you the largest VC in the industry?

Yeah.

What’s the next largest?

Navitas [Capital] at $60 million, which they announced just a couple of days ago, based in Beverly Hills.

We’re not a company that raises money for ourselves. We’re not buying hard assets; we’re investing in fast-growing technology companies. What is distinct about us is that we have a general capital fund and all the companies we invest in are real estate-related or have a real estate dimension to them.

We conceptualized investing in real-world technology…where technology is touching and impacting businesses that have to do with real estate. The approach we take is we really collaborate with these anchor [limited partnerships], we try to identify situations where they’re going to adopt the technology or somehow accelerate their growth and the edge that gives you is threefold.

One, you have an informational edge, right? You know about a partnership or you know about a big adoption decision or big distribution deal before it happens. Two, we take a very different approach to investing. We take a very top-down approach to investing. We’re looking for a technology solution that solves this particular pain point in the market and then we’ll invest in one.

And then the last component, we’re structuring partnerships alongside our deals. So, as you can imagine, for an early-stage company, being able to deliver revenue alongside equity capital is quite profound. That could be game-changing for them.

How many employees do you have?

We have 12 employees and we’re hiring three more as we speak, so 15. Primarily the team is investors, that’s obviously our core competency.

What’s the state of real estate tech today?

We’re early in the innovation cycle, but it depends on what dimension of real estate tech we’re talking about.

You just think aboutVTS for example. It’s grown incredibly fast. What they really do is leasing and asset management platform, so it’s a software layer that permits an owner of a portfolio to communicate with individual owners of an asset, and, in turn, interact with brokers that are representing tenants

It’s a platform layer that lets you see that in real time and then allows you to manipulate it and show the impact on the performance of an entire portfolio. Software for portfolios is less than 10 percent penetrated and the company is doing —we can’t say exactly what their revenue is —but it’s in the tens of millions of dollars right now. (According to Crunchbase, VTS has raised a total of $110,360,000 to date.)

It just goes to show how much runway there is in real estate tech.

What’s changed?

Real estate owners are seeing that there’s a market for operating businesses.

Real estate is an industry that has self-identified as great wheeler-dealers, right? You’re great a buyer or seller of a property. You make your money on the buy or the sell and I think what has certainly happened since the great recession is that you tend to end up owning an asset for a lot longer than you might be able to predict.

So, people that have traditionally thought of themselves as making money by buying or selling are thinking of making their money in operations. That is exactly where technology can add value, by driving incremental revenue through creative real estate concepts like co-working or cutting costs through imaging software, driving transparency for solutions like VTS.

What’s also happening is we are seeing institutionalization of the real estate asset class. So, the fewer the players and the larger your footprint, the more the incentive is to adopt technology across a large footprint.

Have you invested in VTS?

We have invested in VTS. [Wallace declined to specify how much he invested.]

Who else?

States Title,B8ta, which is an interesting retail concept, Appear Here, a platform for pop-up shops.

We don’t say what we put in any company, but we can say in aggregate we’ve invested in just over $70 million in all 14 portfolios.

What is the next big thing in real estate technology for 2018 and beyond?

It’s hard to say what the next big single thing is, but I’ll give you three themes.

One is greater depth and breadth in suite enterprise software solutions for the building. There have been a lot of point solutions—for instance, turning air-conditioners off when people are no longer in the building now. What you’re seeing is like what happened in corporate enterprise software. [Enterprise software refers to large-scale software geared toward supporting an entire organization. This large-scale software allows for several different user roles, and the roles define the actions a specific user can perform.]

Different platforms are becoming enmeshed with each other and integrated. You’re starting to see the ability to operate a building with what looks and feels like the ability to operate a company. What companies have in corporate enterprise software is happening in commercial real estate enterprise software. It’s a huge opportunity obviously.

The second big theme is you’re seeing a big growth in real estate concepts that are asset-like. So, like co-working or co-living, but they are platforms and really operating businesses that look and feel like a real estate business and are providing a service like providing an office or whatever it is without holding an asset. It’s this intermediary asset-like layer. WeWork is just part of a broader changing workplace of space on demand.

What you’re seeing is that the nature of being a real estate company is changing and the service of being a real estate owner and operator is becoming bifurcated from asset ownership. There is this increased level of tenant focus.

It’s far easier to do that when you also don’t have to deal with a building and say, keeping the lights on. It’s just an interesting dynamic that’s playing out in the industry.

You’re starting to see a lot of innovation in real estate fintech [or financial technology]. Real estate capital markets are larger than the U.S. stock market, so it’s just vast. The amount of mortgage debt outstanding in the United States is enormous and is bigger or at least the equivalent to the U.S. stock market. Yet, when you think about how easy it is to buy and sell a stock versus how painful it is to get a mortgage, it’s just unnecessarily archaic and inefficient. We’re starting to see a lot of point solutions emerge in real estate from title insurance, to home insurance, to getting documents notarized to getting your first mortgage, second mortgage.

There are all sorts of direct to the consumer solutions that don’t warrant going into the bank anymore. So again, it’s nothing groundbreaking, it’s just taking a mortgage property and distributing it online, for instance.

We’re obviously in the very early days. At its essential level Blockchain is a derivative of the first land registries. The first property people owned was land. And one of the hardest things to track for land is who actually owns it.

The whole title insurance industry is based on the fact that we don’t have Blockchain. What Blockchain does very eloquently is it conveys ownership and ownership history, so you can trace its lineage—who owned it during a period of time, who traded it to whom and when. It’s verified by the network, who owns that property in the public.

In some aspects, we might have that in the land registry, but it’s semi-private because the counties control some of it and the states, and the title agencies, which are really the ones verifying it are for the most part private. So, it’s a weird disconnect when it would be so much more eloquent to convey ownership through blockchain.

The other thing is that it largely facilitates fractionalization of ownership of real estate. So today the only way to fractionalize ownership are private [limited liability companies], which only credited investors can buy, private REITs which tend to be kind of a dark underworld to the REIT industry where no one really trusts the price of a security because they’re somewhat liquid and then REITs, which are publicly traded, fractionalized ownership positions and real estate equities. And REITs are still only a small portion of the U.S. real estate market.

The promise of Blockchain is you could effectively fractionalize ownership of this building [at 632 S. Hill Street], create a series of points to securitize by a position in the equity of this building and start to free and trade them. And for real estate—it’s an industry that it’s so hard to get in and out of—really the fastest you could sell a place like this is three to six months if you’re lucky and it’s a painful process. But if you could quickly react to say, rising real estate prices, that’s one of the promising things about Blockchain.